QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For
the Quarterly Period Ended September 30, 2008

OR

¨

TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

for
the transition period from _______________ to _______________

Commission
File Number: 000-51719

LINN
ENERGY, LLC

(Exact name of registrant as
specified in its charter)

Delaware

65-1177591

(State
or other jurisdiction of incorporation or organization)

(IRS
Employer

Identification
No.)

600
Travis, Suite 5100

Houston,
Texas

77002

(Address
of principal executive offices)

(Zip
Code)

(281) 840-4000

(Registrant’s
telephone number, including area
code)

Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes x No ¨

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one).

As
commonly used in the oil and gas industry and as used in this Quarterly Report
on Form 10-Q, the following terms have the following meanings:

Bbl. One stock
tank barrel or 42 United States gallons liquid volume.

Bcfe. One billion
cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of
oil, condensate or natural gas liquids.

MBbls. One
thousand barrels of oil or other liquid hydrocarbons.

MBbls/d. MBbls per
day.

Mcf. One thousand
cubic feet.

Mcfe. One thousand
cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.

Mid-Continent
I. February 2007 acquisition of oil and gas properties in the
Texas Panhandle from Cavallo Energy LP, acting through its general partner,
Stallion Energy LLC, for a contract price of $415.0 million.

Mid-Continent
II. June 2007 acquisition of oil and gas properties in the
Texas Panhandle for a contract price of $90.5 million.

Mid-Continent
III. August 2007 acquisition of oil and gas properties in
Oklahoma, Kansas and the Texas Panhandle from Dominion Resources, Inc. for a
contract price of $2.05 billion.

Mid-Continent
IV. January 2008 acquisition of oil and gas properties in
Oklahoma from Lamamco Drilling Company for a contract price of $552.2
million.

MMBtu. One million
British thermal units.

MMcf. One million
cubic feet.

MMcf/d. MMcf per
day.

MMcfe. One million
cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of
oil, condensate or natural gas liquids.

MMcfe/d. MMcfe per
day.

MMMBtu. One
billion British thermal units.

NYMEX. The New
York Mercantile Exchange.

Tcfe. One trillion
cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.

Linn
Energy, LLC (“Linn Energy” or the “Company”) is an independent oil and gas
company focused on the development and acquisition of long life properties which
complement its asset profile in producing basins within the United
States.

The
condensed consolidated financial statements at September 30, 2008, and for
the three and nine months ended September 30, 2008 and 2007, are unaudited,
but in the opinion of management include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
for the interim periods. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
United States generally accepted accounting principles (“GAAP”) have been
condensed or omitted under Securities and Exchange Commission (“SEC”) rules and
regulations, and as such this report should be read in conjunction with the
financial statements and notes in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2007. The results reported in
these unaudited condensed consolidated financial statements should not
necessarily be taken as indicative of results that may be expected for the
entire year.

Certain
amounts in the condensed consolidated financial statements and notes thereto
have been reclassified to conform to the 2008 financial statement
presentation. Such reclassifications include those related to the
presentation of discontinued operations (see Note 2) on the condensed
consolidated statements of operations.

The
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated upon consolidation.

Management
of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and revenues and expenses and the disclosure
of contingent assets and liabilities to prepare these condensed consolidated
financial statements in conformity with GAAP. Actual results could
differ from those estimates.

The
Company’s Appalachian Basin and Mid Atlantic Well Service (“Mid Atlantic”)
operations have been classified as discontinued operations on the condensed
consolidated statement of operations for all periods
presented. Unless otherwise indicated, information about the
statement of operations that is presented in the notes to condensed consolidated
financial statements relates only to Linn Energy’s continuing
operations.

(2)

Assets
Held for Sale and Discontinued
Operations

On
July 1, 2008, the Company completed the sale of its interests in oil and
gas properties located in the Appalachian Basin to XTO Energy, Inc. (“XTO”) for
a contract price of $600.0 million. Net proceeds were $568.1 million
and the carrying value of net assets sold was $405.3 million, resulting in a
gain on the sale of $162.8 million, which is recorded in “discontinued
operations: gain on sale of assets, net of taxes” on the condensed consolidated
statements of operations. The gain is subject to normal post-closing
adjustments. The Company used the net proceeds from the sale to repay
loans outstanding under its term loan agreement and reduce indebtedness under
its credit facility (see Note 8).

In
addition, in March 2008, the Company exited the drilling and service business in
the Appalachian Basin provided by its wholly owned subsidiary Mid Atlantic Well
Service (“Mid Atlantic”). At September 30, 2008, substantially
all of the property and equipment previously held by Mid Atlantic totaling $9.2
million had been sold. During the three and nine months ended
September 30, 2008, the Company recorded a loss on the sale of the Mid
Atlantic assets of $0.3 million and $1.6 million, respectively, which is
recorded in “discontinued operations: gain on sale of assets, net of taxes” on
the condensed consolidated statements of operations.

The
following summarizes the Appalachian Basin and Mid Atlantic amounts included in
income from discontinued operations on the condensed consolidated statements of
operations.

Three
Months Ended

September 30,

Nine
Months Ended

September 30,

2008

2007

2008

2007

(in
thousands)

Total
revenues and other

$

(421

)

$

14,707

$

49,564

$

51,394

Total
operating expenses

(1,549

)

(13,980

)

(23,779

)

(39,051

)

Interest
expense

196

(5,774

)

(13,398

)

(17,246

)

Income
(loss) from discontinued operations

(1,774

)

(5,047

)

12,387

(4,903

)

Income
tax benefit

―

656

―

1,024

Income
(loss) from discontinued operations, net of taxes

$

(1,774

)

$

(4,391

)

$

12,387

$

(3,879

)

The
Company computed interest expense related to discontinued operations in
accordance with Emerging Issues Task Force Issue No. 87-24, “Allocation of Interest to
Discontinued Operations” based on debt required to be repaid as a result
of the disposal transaction.

On
August 15, 2008, the Company completed the sale of certain of its assets in
the Verden area in Oklahoma to Laredo Petroleum, Inc. (“Laredo”) for a contract
price of $185.0 million, subject to closing adjustments. Net proceeds
and the carrying value of net assets sold were approximately $167.5
million. The Verden assets were acquired by the Company with its
acquisition of oil and gas properties from Dominion Resources, Inc. (“Dominion”)
in August 2007. The Company used the net proceeds from the sale to
reduce indebtedness (see Note 8).

In
addition, on October 9, 2008, the Company entered into an agreement to sell
its deep rights in certain central Oklahoma acreage, which includes the Woodford
Shale interval, for a contract price of $229.1 million, subject to closing
adjustments. The sale includes no producing reserves and Linn Energy
will retain the rights to the shallow portion of this acreage. The
Company anticipates closing in the fourth quarter of 2008, subject to closing
conditions. There can be no assurance that all of the conditions to
closing will be satisfied. At September 30, 2008, the carrying value
of net assets to be sold of approximately $58.1 million is included in
“noncurrent assets held for sale” on the condensed consolidated balance
sheet. These assets were acquired by the Company with its acquisition of
oil and gas properties from Dominion in August 2007. The Company
plans to use the net proceeds from the sale to reduce indebtedness (see
Note 8).

(3)

Acquisitions

The
Company accounts for its acquisitions using the purchase method of accounting as
prescribed in SFAS No. 141, “Business
Combinations.” On January 31, 2008, the Company completed
the acquisition of certain oil and gas properties located primarily in the
Mid-Continent region from Lamamco Drilling Company (“Lamamco”) for a contract
price of $552.2 million, subject to closing adjustments (“Mid-Continent
IV”). The acquisition was financed with a combination of borrowings
under the Company’s credit facility and proceeds from a term loan entered into
at closing (see Note 8).

The
following presents the purchase accounting for the Mid-Continent IV
acquisition, based on estimates of fair value:

Mid-Continent
IV

(in
thousands)

Cash

$

537,124

Estimated
transaction costs

635

537,759

Fair
value of liabilities assumed

4,029

Total
purchase price

$

541,788

The
following presents the allocation of the purchase price for the
Mid-Continent IV acquisition, based on estimates of fair
value:

Mid-Continent
IV

(in
thousands)

Current
assets

$

1,811

Oil
and gas properties

537,868

Other
property and equipment

2,109

$

541,788

The
purchase price and purchase price allocation above are based on reserve reports,
published market prices and estimates by management. The most
significant assumptions are related to the estimated fair values assigned to
proved oil and gas properties. To estimate the fair values of these
properties, the Company utilized estimates of oil and gas
reserves. The Company estimated future prices to apply to the
estimated reserve quantities acquired, and estimated future operating and
development costs to arrive at estimates of future net revenues. The
Company also reviewed comparable purchases and sales of oil and gas properties
within the same regions.

The
following unaudited pro forma financial information presents a summary of Linn
Energy’s consolidated results of continuing operations for the three and nine
months ended September 30, 2008 and 2007, assuming the
Mid-Continent IV acquisition had been completed as of January 1, 2007,
including adjustments to reflect the allocation of the purchase price to the
acquired net assets. The pro forma financial information also assumes
that the following 2007 acquisitions were completed as of January 1,
2007:

·

February 1,
2007, acquisition of certain oil and gas properties and related assets in
the Texas Panhandle for a contract price of $415.0 million
(“Mid-Continent I”)

·

June 12,
2007, acquisition of certain oil and gas properties in the Texas Panhandle
for a contract price of $90.5 million
(“Mid-Continent II”)

·

August 31,
2007, acquisition of certain oil and gas properties in the Mid-Continent,
in Oklahoma, Kansas and the Texas Panhandle for a contract price of
$2.05 billion
(“Mid-Continent III”)

The
revenues and expenses of the Mid-Continent I, Mid-Continent II and
Mid-Continent III assets are included in the consolidated results of the Company
as of February 1, 2007, June 12, 2007 and

September 1,
2007, respectively. The revenues and expenses of the
Mid-Continent IV assets are included in the consolidated results of the
Company effective February 1, 2008. The pro forma financial
information is not necessarily indicative of the results of operations if the
acquisitions had been effective as of January 1, 2007. All amounts
reflect continuing operations.

Three
Months Ended September 30,

Nine
Months Ended

September 30,

2007

2008

2007

(in
thousands, except per unit amounts)

Total
revenues and other

$

81,183

$

400,323

$

265,758

Total
operating expenses

$

97,376

$

360,321

$

268,299

Loss
from continuing operations

$

(51,488

)

$

(61,391

)

$

(96,482

)

Loss
from continuing operations per unit:

Units
– basic

$

(0.64

)

$

(0.54

)

$

(1.56

)

Units
– diluted

$

(0.64

)

$

(0.54

)

$

(1.56

)

Class
D – basic

$

(0.64

)

$

―

$

(1.56

)

Class
D – diluted

$

(0.64

)

$

―

$

(1.56

)

(4)

Goodwill

The
entire goodwill balance of $64.4 million at December 31, 2007 related to
the Mid-Continent III acquisition in August 2007 (see
Note 3).

The
following reflects the changes in the carrying amount of goodwill during the
nine months ended September 30, 2008 and the year ended December 31,
2007 (in thousands):

Balance,
December 31, 2006

$

—

Mid-Continent
III acquisition

64,419

Balance,
December 31, 2007

64,419

Purchase
accounting adjustments:

Post
closing statement and other

7,935

Verden
assets (1)

(19,200

)

Woodford
Shale assets (1)

(53,154

)

Balance,
September 30, 2008

$

—

(1)

Represents
update to preliminary purchase accounting in which amounts were allocated
to unproved oil and gas properties and subsequently sold or held for sale
as of September 30, 2008 (see
Note 2).

(5)

Unitholders’
Capital

Issuance
of Units

During
the nine months ended September 30, 2008, the Company issued 410,000 units
in connection with the termination of certain contractual obligations in the
Western region (equal to a fair value of approximately $8.7
million).

During
the nine months ended September 30, 2008, the Company issued 600,000 units
in connection with the acquisition of certain gas properties in the Appalachian
Basin (equal to a fair value of approximately $14.7 million).

Cancellation
of Units

During
the nine months ended September 30, 2008, the Company purchased 94,521
restricted units from employees for approximately $2.0 million in conjunction
with the vesting of restricted unit awards. The proceeds were used to
fund the employees’ minimum payroll taxes on the awards, and the Company
canceled the units.

(6)

Oil
and Gas Capitalized Costs

Aggregate
capitalized costs related to oil and gas production activities with applicable
accumulated depreciation, depletion and amortization are presented
below:

September 30,

December 31,

2008

2007

(in
thousands)

Proved
properties:

Leasehold
acquisition

$

3,306,728

$

3,095,400

Development

331,914

254,251

Unproved
properties

95,833

156,908

Gas
compression plant and pipelines

87,938

112,182

3,822,413

3,618,741

Less
accumulated depletion, depreciation and amortization

(205,520

)

(127,265

)

$

3,616,893

$

3,491,476

(7)

Business
and Credit Concentrations

For the
three and nine months ended September 30, 2008, the Company’s four largest
customers represented approximately 17%, 12%, 11% and 10% and 19%, 11%, 11% and
10%, respectively, of the Company’s sales. For the three and nine
months ended September 30, 2007, the Company’s two largest customers
represented approximately 27% and 25%, and 31% and 25%, respectively, of the
Company’s sales.

At
September 30, 2008, three customers’ trade accounts receivable from oil,
gas and natural gas liquids (“NGL”) sales accounted for more than 10% of the
Company’s total trade accounts receivable. As of September 30,
2008, trade accounts receivable from the Company’s three largest customers
represented approximately 19%, 14% and 10% of the Company’s
receivables. At December 31, 2007, three customers’ trade
accounts receivable from oil, gas and NGL sales accounted for more than 10% of
the Company’s total trade accounts receivable. As of
December 31, 2007, trade accounts receivable from the Company’s three
largest customers represented approximately 22%, 13% and 12% of the Company’s
receivables.

At
September 30, 2008 and December 31, 2007, the Company had the
following debt outstanding:

September 30,

December 31,

2008

2007

(in
thousands)

Credit
facility (1)

$

1,521,393

$

1,443,000

Senior
notes, net (2)

250,086

—

Less
current maturities

—

—

$

1,771,479

$

1,443,000

(1)

Variable
rate of 4.39% at September 30, 2008 and 7.02% at December 31,
2007.

(2)

Fixed
rate of 9.875%; net of unamortized discount of approximately $5.8 million
at September 30, 2008.

Credit
Facility

At
September 30, 2008, the Company had a $1.85 billion borrowing base under
its Third Amended and Restated Credit Agreement (“Credit Facility”) with a
maturity of August 2010. During the third quarter of 2008, the
Company repaid $513.6 million in indebtedness under its Credit Facility with net
proceeds from the sales of Appalachian Basin and Verden properties (see
Note 2).

The
borrowing base under the Credit Facility will be redetermined semi-annually by
the lenders in their sole discretion, based on, among other things, reserve
reports as prepared by reserve engineers taking into account the oil and gas
prices at such time. At the Company’s election, interest on
borrowings under the Credit Facility is determined by reference to either the
London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.00%
and 1.75% per annum or the alternate base rate (“ABR”) plus an applicable margin
between 0% and 0.25% per annum.

Certain
subsidiaries of Lehman Brothers Holdings Inc. (“Lehman Holdings”), including
Lehman Brothers Commodity Services Inc. (“Lehman Commodity Services”), were
lenders in the Company’s Credit Facility. In September 2008 and
October 2008, Lehman Holdings and Lehman Commodity Services, respectively, filed
voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (see Note 11). At September 30,
2008, available borrowing under the Credit Facility was $313.9 million, which
includes a $6.5 million reduction in availability for outstanding letters of
credit and an $8.2 million reduction for the unfunded portion of Lehman
Holdings’ subsidiaries’ approximate 2.5% commitment. In October 2008,
the Company replaced Lehman Holdings’ subsidiaries with another lender and
Lehman Holdings’ subsidiaries no longer participate in the Company’s Credit
Facility. Available borrowing under the Credit Facility was $285.2
million at October 31, 2008 which includes a $6.4 million reduction in
availability for outstanding letters of credit and the restoration of the
previously unavailable Lehman Holdings’ subsidiaries’ commitment.

Term
Loan

On
January 31, 2008, in order to fund a portion of the January 2008
acquisition of oil and gas properties in the Mid-Continent (see Note 3),
the Company entered into a $400.0 million Second Lien Term Loan Agreement (“Term
Loan”) maturing on July 31, 2009. Interest was determined by
reference to LIBOR plus an applicable margin of 5.0% for the first twelve months
and 7.5% for the remaining period until maturity or a domestic bank rate plus an
applicable margin of 3.5% for the first twelve months and 6.0%

for the
remaining period until maturity. On June 30, 2008, the Company
repaid $243.6 million in indebtedness under the Term Loan with net proceeds from
the Senior Notes (see below). On July 1, 2008, the Company
repaid the balance of the term loan of $156.4 million. Deferred
financing fees associated with the Term Loan of approximately $1.9 million and
$4.6 million were written off during the three and nine months ended
September 30, 2008, respectively.

Senior
Notes

On
June 24, 2008, the Company entered into a purchase agreement with a group
of initial purchasers (“Initial Purchasers”) pursuant to which the Company
agreed to issue $255.9 million in aggregate principal amount of the Company’s
senior notes due 2018 (“Senior Notes”). The Senior Notes were offered
and sold to the Initial Purchasers and then resold to qualified institutional
buyers each in transactions exempt from the registration requirements under the
Securities Act of 1933, as amended (“Securities Act”). The Company
used the net proceeds (after deducting the Initial Purchasers’ discounts and
offering expense) of approximately $243.6 million to repay loans outstanding
under the Company’s Term Loan (see above). In connection with the
Senior Notes, the Company incurred financing fees of approximately $7.3 million,
which will be amortized over the life of the Senior Notes and recorded in
interest expense. The $5.9 million discount on the Senior Notes will
be amortized over the life of the Senior Notes and recorded in interest
expense.

The
Senior Notes were issued under an Indenture dated June 27, 2008
(“Indenture”), mature on July 1, 2018 and bear interest at
9.875%. Interest is payable semi-annually beginning January 1,
2009. The Senior Notes are general unsecured senior obligations of
the Company and are effectively junior in right of payment to any secured
indebtedness of the Company to the extent of the collateral securing such
indebtedness. Each of the Company’s material subsidiaries guaranteed
the Senior Notes on a senior unsecured basis. The Indenture provides
that the Company may redeem: 1) on or prior to July 1, 2011, up to 35%
of the aggregate principal amount of the Senior Notes at a redemption price of
109.875% of the principal amount, plus accrued and unpaid interest,
2) prior to July 1, 2013, all or part of the Senior Notes at a
redemption price equal to the principal amount, plus a make whole premium (as
defined in the Indenture) and accrued and unpaid interest, and 3) on or
after July 1, 2013, all or part of the Senior Notes at redemption prices
equal to 104.938% in 2013, 103.292% in 2014, 101.646% in 2015 and 100% in 2016
and thereafter. The Indenture also provides that, if a change of
control (as defined in the Indenture) occurs, the holders have a right to
require the Company to repurchase all or part of the Senior Notes at a
redemption price equal to 101%, plus accrued and unpaid interest.

The
Senior Notes’ Indenture contains covenants that, among other things, limit the
Company’s ability to: (i) pay distributions on, purchase or redeem the
Company’s units or redeem its subordinated debt; (ii) make investments;
(iii) incur or guarantee additional indebtedness or issue certain types of
equity securities; (iv) create certain liens; (v) sell assets;
(vi) consolidate, merge or transfer all or substantially all of the
Company’s assets; (vii) enter into agreements that restrict distributions
or other payments from the Company’s restricted subsidiaries to the Company;
(viii) engage in transactions with affiliates; and (ix) create
unrestricted subsidiaries.

In
connection with the issuance and sale of the Senior Notes, the Company entered
into a Registration Rights Agreement (“Registration Rights Agreement”) with the
Initial Purchasers. Under the Registration Rights Agreement, the
Company agreed to use its reasonable best efforts to file with the SEC and cause
to become effective a registration statement relating to an offer to issue new
notes having terms substantially identical to the Senior Notes in exchange for
outstanding Senior Notes. In certain circumstances, the Company may
be required to file a shelf registration statement to cover resales of the
Senior Notes. The Company will not be obligated to file the
registration statements described above if the restrictive legend on the Senior
Notes has been removed and the Senior Notes are freely tradable (in each case,
other than with respect to persons that are affiliates of the Company) pursuant
to Rule 144 under the Securities Act, as of the 366th day after the Senior
Notes were issued. If the Company fails to satisfy its obligations
under the Registration Rights Agreement, the Company may be required to pay
additional interest to holders of the Senior Notes under certain
circumstances.

(9)

Derivatives

Commodity
Derivatives

The
Company sells oil, gas and NGL in the normal course of its business and utilizes
derivative instruments to minimize the variability in cash flows due to price
movements in oil, gas and NGL. The Company enters into derivative
instruments such as swap contracts, collars and put options to economically
hedge a portion of its forecasted oil, gas and NGL sales. Oil puts
are also used to economically hedge NGL sales. The Company did not
designate these contracts as cash flow hedges under SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities,” as amended, (“SFAS 133”);
therefore, the changes in fair value of these instruments are recorded in
current earnings. See Note 10 for additional disclosures about
oil and gas commodity derivatives as required by Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”).

The
following table summarizes open positions as of September 30, 2008 and
represents, as of such date, derivatives in place through December 31,
2014, on annual production volumes:

Year

2008

Year

2009

Year

2010

Year

2011

Year

2012

Year

2013

Year

2014

Gas
Positions:

Fixed
Price Swaps:

Hedged
Volume (MMMBtu)

9,936

39,586

39,566

31,901

29,662

―

―

Average
Price ($/MMBtu)

$

8.68

$

8.53

$

8.20

$

8.27

$

8.46

$

―

$

―

Puts:

Hedged
Volume (MMMBtu)

1,766

6,960

6,960

6,960

―

―

―

Average
Price ($/MMBtu)

$

8.07

$

7.50

$

7.50

$

7.50

$

―

$

―

$

―

PEPL
Puts: (1)

Hedged
Volume (MMMBtu)

964

5,334

10,634

13,259

5,934

―

―

Average
Price ($/MMBtu)

$

7.85

$

7.85

$

7.85

$

7.85

$

7.85

$

―

$

―

Total:

Hedged
Volume (MMMBtu)

12,666

51,880

57,160

52,120

35,596

―

―

Average
Price ($/MMBtu)

$

8.53

$

8.32

$

8.05

$

8.06

$

8.36

$

―

$

―

Oil
Positions:

Fixed
Price Swaps:

Hedged
Volume (MBbls)

688

2,437

2,150

2,073

2,025

2,275

2,200

Average
Price ($/Bbl)

$

82.11

$

90.00

$

90.00

$

84.22

$

84.22

$

84.22

$

84.22

Puts:
(2)

Hedged
Volume (MBbls)

467

1,843

2,250

2,352

500

―

―

Average
Price ($/Bbl)

$

73.34

$

120.00

$

110.00

$

69.11

$

77.73

$

―

$

―

Collars:

Hedged
Volume (MBbls)

―

250

250

276

348

―

―

Average
Floor Price ($/Bbl)

$

―

$

90.00

$

90.00

$

90.00

$

90.00

$

―

$

―

Average
Ceiling Price ($/Bbl)

$

―

$

114.25

$

112.00

$

112.25

$

112.35

$

―

$

―

Total:

Hedged
Volume (MBbls)

1,155

4,530

4,650

4,701

2,873

2,275

2,200

Average
Price ($/Bbl)

$

78.57

$

102.21

$

99.68

$

77.00

$

83.79

$

84.22

$

84.22

Gas
Basis Differential Positions:

PEPL
Basis Swaps: (3)

Hedged
Volume (MMMBtu)

9,036

34,666

29,366

26,741

34,066

―

―

Hedged
Differential ($/MMBtu)

$

(0.95

)

$

(0.95

)

$

(0.95

)

$

(0.95

)

$

(0.95

)

$

―

$

―

(1)

Settle
on the Panhandle Eastern Pipeline (“PEPL”) spot price of gas to hedge
basis differential associated with gas production in the Mid-Continent
region.

(2)

The
Company utilizes oil puts to hedge revenues associated with its NGL
production.

(3)

Represents
a swap of the basis between the New York Mercantile Exchange (“NYMEX”) and
the PEPL spot price of gas of $(0.95) per MMBtu for the volumes
hedged.

Settled
derivatives on gas production for the three and nine months ended
September 30, 2008 included a volume of 12,906 MMMBtu and 38,064 MMMBtu at
an average contract price of $8.53 and $8.47, respectively. Settled
derivatives on oil and NGL production for the three and nine months ended
September 30, 2008 included a volume of 1,013 MBbls and 3,151 MBbls at an
average contract price of $78.07 and $77.56, respectively. The gas
derivatives are settled based on the closing NYMEX future price of gas or on the
published PEPL spot price of gas on the settlement date, which occurs on the
third day

preceding
the production month. The oil transactions are settled based on the
average month’s daily NYMEX price of light oil and settlement occurs on the
final day of the production month.

By using
derivative instruments to economically hedge exposures to changes in commodity
prices, the Company exposes itself to credit risk and market
risk. Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which
creates credit risk. The Company minimizes the credit risk in
derivative instruments by 1) limiting its exposure to any single
counterparty, 2) entering into derivative instruments only with
counterparties that are also lenders in the Company’s Credit Facility, each of
which currently meet the Company’s minimum credit quality standard, and
3) monitoring the creditworthiness of the Company’s counterparties on an
ongoing basis. See Note 11 for details about canceled commodity
contracts with Lehman Commodity Services.

Interest
Rate Swaps

The
Company has entered into interest rate swap agreements based on LIBOR to
minimize the effect of fluctuations in interest rates. If LIBOR is
lower than the fixed rate in the contract, the Company is required to pay the
counterparties the difference, and conversely, the counterparties are required
to pay the Company if LIBOR is higher than the fixed rate in the
contract. The Company did not designate the interest rate swap
agreements as cash flow hedges under SFAS No. 133; therefore, the changes
in fair value of these instruments are recorded in current
earnings. See Note 10 for additional disclosures about interest
rate swaps as required by SFAS 157.

The
following presents the settlement terms of the interest rate swaps:

Year

2008

Year

2009

Year

2010

Year

2011
(1)

(dollars
in thousands)

Notional
Amount

$

1,212,000

$

1,212,000

$

1,212,000

$

1,212,000

Fixed
Rate

4.20

%

5.06

%

5.06

%

5.06

%

(1)

Represents
interest rate swaps that settle in January
2011.

Outstanding
Notional Amounts

The
following presents the outstanding notional amounts and maximum number of months
outstanding of derivative instruments:

The
Company’s commodity derivatives and interest rate swap derivatives are presented
on a net basis in “derivative instruments” on the condensed consolidated balance
sheets. The following summarizes the fair value of derivatives
outstanding on a gross basis:

September 30,

December 31,

2008

2007

(in
thousands)

Assets:

Commodity
derivatives

$

299,128

$

246,124

Interest
rate swaps

179

2,548

$

299,307

$

248,672

Liabilities:

Commodity
derivatives

$

341,126

$

260,058

Interest
rate swaps

37,739

32,475

$

378,865

$

292,533

The
Company’s counterparties are participants in its Credit Facility (see
Note 8) which is secured by the Company’s oil and gas reserves; therefore,
the Company is not required to post any collateral. The Company does
not require collateral from the counterparties. The maximum amount of
loss due to credit risk, based on the gross fair value of financial instruments
that the Company would incur if its counterparties failed completely to perform
according to the terms of the contracts was approximately $8.4 million at
September 30, 2008. In accordance with the Company’s standard
practice, its commodity and interest rate swap derivatives are subject to
counterparty netting under the agreements governing such derivatives and
therefore the risk of such loss is mitigated at September 30,
2008.

Gain
(Loss) on Derivatives

Gains and
losses on derivatives are reported on the condensed consolidated statements of
operations in “gain (loss) on oil and gas derivatives” and “loss on interest
rate swaps” and include realized and unrealized gains
(losses). Realized gains (losses), excluding canceled commodity
derivatives, represent amounts related to the settlement of derivative
instruments, and for commodity derivatives, are aligned with the underlying
production. Unrealized gains (losses) represent the change in fair
value of the derivative instruments and are non-cash items. The
following presents the Company’s reported gains and losses on derivative
instruments:

Three
Months Ended September 30,

Nine
Months Ended September 30,

2008

2007

2008

2007

(in
thousands)

Realized
gains (losses):

Commodity
derivatives

$

(28,270

)

$

10,756

$

(62,289

)

$

24,649

Canceled
commodity derivatives

(13,161

)

―

(81,358

)

―

Interest
rate swaps

(5,817

)

647

(11,479

)

729

$

(47,248

)

$

11,403

$

(155,126

)

$

25,378

Unrealized
gains (losses):

Commodity
derivatives (1)

$

887,249

$

(76,196

)

$

(150,133

)

$

(168,237

)

Interest
rate swaps

(3,877

)

(3,798

)

(6,004

)

(3,683

)

$

883,372

$

(79,994

)

$

(156,137

)

$

(171,920

)

Total
gains (losses):

Commodity
derivatives

$

845,818

$

(65,440

)

$

(293,780

)

$

(143,588

)

Interest
rate swaps

(9,694

)

(3,151

)

(17,483

)

(2,954

)

$

836,124

$

(68,591

)

$

(311,263

)

$

(146,542

)

(1)

Includes
a net unrealized gain of approximately $6.7 million related to canceled
derivative contracts with Lehman Commodity Services (see Note 11) for
the three and nine months ended September 30,
2008.

During
the three and nine months ended September 30, 2008, the Company canceled
(before the contract settlement date) derivative contracts on estimated future
gas production resulting in realized losses of $13.2 million and $81.4 million,
respectively. The future gas production under the canceled contracts
primarily related to properties in the Verden area and the Appalachian Basin
(see Note 2).

In
addition, in September 2008, the Company canceled (before the contract
settlement date) all of its commodity derivative contracts with Lehman Commodity
Services as counterparty. The Company entered into contracts for
substantially the same volumes at identical strike prices with another
participant in its Credit Facility for a cost of approximately $67.6
million. As a result, effective September 17, 2008, Lehman
Commodity Services was no longer a counterparty to any of the Company’s
commodity derivative contracts and the Company’s overall derivative positions
are unchanged. See Note 11 for details about the Company’s
receivable for the canceled derivative contracts from Lehman Commodity
Services.

(10)

Fair
Value of Financial Instruments

The
Company accounts for its oil and gas commodity derivatives and interest rate
swaps at fair value (see Note 9) on a recurring basis. Effective
January 1, 2008, the Company adopted SFAS 157 for these financial
instruments. SFAS 157 defines fair value, establishes a
framework for measuring fair value, establishes a fair value hierarchy based on
the quality of inputs used to measure fair value, and enhances disclosure
requirements for fair value measurements. The impact of the adoption
of SFAS 157 to the Company’s results of operations was a decrease to net
income by approximately $66.6 million, or $0.58 per unit, for the three months
ended September 30, 2008, resulting from an assumed credit risk
adjustment. The impact of the adoption was an increase to net income
by approximately $21.4 million, or $0.19 per unit, for the nine months ended
September 30, 2008, resulting from an assumed credit risk
adjustment.

The fair
value of derivative instruments is determined utilizing pricing models for
significantly similar instruments. The models use a variety of
techniques to arrive at fair value, including quotes and pricing
analysis. Inputs to the pricing models include publicly available
prices and forward curves generated from a compilation of data gathered from
third parties.

In
accordance with SFAS 157, the Company has categorized its financial
instruments, based on the priority of inputs to the valuation technique, into a
three-level fair value hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3).

Financial
assets and liabilities recorded on the condensed consolidated balance sheets are
categorized based on the inputs to the valuation techniques as
follows:

Level 1

Financial
assets and liabilities for which values are based on unadjusted quoted
prices for identical assets or liabilities in an active market that
management has the ability to
access.

Level 2

Financial
assets and liabilities for which values are based on quoted prices in
markets that are not active or model inputs that are observable either
directly or indirectly for substantially the full term of the asset or
liability (commodity derivatives and interest rate
swaps).

Level 3

Financial
assets and liabilities for which values are based on prices or valuation
techniques that require inputs that are both unobservable and significant
to the overall fair value measurement. These inputs reflect
management’s own assumptions about the assumptions a market participant
would use in pricing the asset or
liability.

As
required by SFAS 157, when the inputs used to measure fair value fall
within different levels of the hierarchy in a liquid environment, the level
within which the fair value measurement is categorized is based on the lowest
level input that is significant to the fair value measurement in its
entirety. The Company conducts a review of fair value hierarchy
classifications on a quarterly basis. Changes in the observability of
valuation inputs may result in a reclassification for certain financial assets
or liabilities.

The
following presents the Company’s fair value hierarchy for assets and liabilities
measured at fair value on a recurring basis at September 30,
2008. These items are included in “derivative instruments” on the
condensed consolidated balance sheet.

On
September 15, 2008, Lehman Holdings filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter
11”) with the United States Bankruptcy Court for the Southern District of New
York (the “Court”). On October 3, 2008, Lehman Commodity Services
also filed a voluntary petition for reorganization under Chapter 11 with the
Court. As of September 30, 2008, the Company had a receivable of
approximately $67.6 million from Lehman Commodity Services for canceled
derivative contracts (see Note 9). The Company is pursuing
various legal remedies to protect its interests. Based on market
expectations, at September 30, 2008, the Company estimated approximately
$6.7 million of the receivable balance to be collectible. The net
receivable of approximately $6.7 million is included in “other current assets,
net” on the condensed consolidated balance sheet at September 30,
2008. The associated gain of approximately $67.6 million and the
estimated loss of approximately $60.9 million is included in “gain (loss) on oil
and gas derivatives” on the condensed consolidated statements of operations for
the three and nine months ended September 30, 2008, for a net gain of
approximately $6.7 million. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position, results of operations or liquidity.

From time
to time the Company is a party to various legal proceedings or is subject to
industry rulings that could bring rise to claims in the ordinary course of
business. The Company is not currently a party to any litigation or
pending claims that it believes would have a material adverse effect on its
business, financial position, results of operations or liquidity.